The Office for Budget Responsibility has warned that the amount of income tax that the UK government will collect is not going to meet its targets.
Even though the UK economy is bouncing back and the jobless rate has recovered, tax revenues are going to be lower than forecast because of weak wage growth and the high percentage of people with low-paid jobs or self-employed.
In an interview with the BBC, Robert Chote, chairman of the OBR, said that “from the perspective of the public finances, that’s not particularly good news,”
“The Chancellor of the Exchequer gets more bang for his buck if wages and salaries rise as a result of people’s earnings going up than if employment goes up.
“If earnings go up you are taking more people into higher income tax brackets, whereas if employment is going up you are perhaps bringing in more people at the bottom.
“This continued story of earnings growing less rapidly than expected and employment growing more rapidly than expected does perhaps suggest that we’re more likely to be disappointed than to overachieve on income tax receipts this year.”
There may be more people working, however earnings are not high enough. The effective tax rate on labor income is largely reduced by the high proportion of wages and salaries subject to the £10,000 personal allowance.
In August tax receipts fell by 0.8 percent compared to a full-year forecast of a 6.5 per cent rise. The OBR said that the decline could have been because of the timing of receipts, adding that there will be a boost to 2015 self-assessment receipts because of the number of self-employed.
George Osborne had borrow £11.6bn in August to make up for the revenue and spending gap, which was £700m more than a year earlier, according to the Office for National Statistics.
Treasury chief secretary Danny Alexander told the Today programme:
“One of the things we are seeing in the UK is a very large fall in youth unemployment,”
“Young people at the start of their careers tend to earn significantly below the median income. That doesn’t mean that those are low-quality jobs.
“It does mean that those are people who are able to start out in life in the workplace, which is something that is hugely important.”
It was previously forecast that he would have to borrow 12 percent less this year compared to the year before, however, he has borrowed 6 percent more so far.